jp morgan and its whales

JP Morgan is currently in talks with the department of justice regarding a settlement payout of about $11 b in fine on its mortgage backed securities transactions in the past. 

It is also in the news regarding its London Whale fiasco. The losses due to aggressive bets on credit default swaps trades were estimated at $5.4 b, which later were reported to be much higher; in addition, now fines have been levied to the tune of $920 m for violating securities laws as key information regarding the trades were withheld from the board. 

Too much of losses and too much of payouts; it is troubling times for JPM for sure. 

Many of the investment banks have been under the radar, but not punished adequately, for their reckless behavior: aggressive (proprietary) trading, rogue trading, insider trading, speculative trading. Top executives who are the real culprits keep doing the stuff they are used to. The documentary film, inside job, shows how the financial system collapsed and how top managers got away.

Back to JPM which earned about $23 b during the last four quarters. If that $11 b materializes, about 50% of its earnings will be dusted. But then it had some $593 b of cash as of 30 June 2013, which will be of some use now, albeit at the cost of its shareholders. 

It would surely like to pay up and forget. What we can say, grow up?

ril: declining returns

We have mentioned RIL on a few occasions: Conflicting analysts, Cost of diversion, Lure of technology.

Here's its long-term performance:

The first half of the movie was pretty good; great performance. It is the second half that has let us down: some self-inflicted, over-the-top acts, and some externally-forced (political) stunts. The result: Market value is about 11% down from its 2010 peak.

Is it because of this?

Too many matters on hand to sort out at this stage; but then, we are pretty confident that it will pull it off. 

Will it? Let's ponder....

$25 b worth nokia: funny side

Nokia has been in the news for wrong reasons in the past few years. However, more recently it is making headlines for different reasons. 

The positive optimism is evident as the stock price jumped 60% from $4.12 to $6.58 in a month: 

Two recent transactions have made Nokia come back in the reckoning. The first is its (50%) acquisition of network business from Siemens to have full ownership for $2.2 b. The second is its sale of handset business and patent licencing to Microsoft for $7.2 b.

Today after the market has discounted these transactions and considered Nokia as a new business it is trading at $6.58 per share or $25 b. Let's find out if it is worth that much now. Of course, all this is just for some fun because valuation of a technology firm is like looking for a needle in haystack.

The new Nokia will have three separate businesses going forward: 

The network (NSN) business which, if we take the recent transaction as fairly valued (we doubt it), is worth $4.4 b. It is reported that this business will generate about Euro 500-700 per year, in which case, we can value it as a perpetuity at about $6 to 6.5 b at the same expected rate of 12% as reported. 

Here maps business is valued at about $1 b; we don't want to debate this for two reasons: we don't have the full information and we don't see it as a big deal.

Patents (IP licencing) business is expected to generate Euro 500 m based on the above report; considering its average expected life of about 13 years and the same expected rate of 12%, it can be valued as an annuity to get a value of about $4.2 b.

Finally, there is one more business, that is of cash. Nokia reported cash of Euro 9.8 b as of 30 June 2013. If we do some simple arithmetic, now its cash should be Euro 9.8 b less $2.2 b acquisition of NSN from Siemens plus $7.2 b proceeds from sale of handsets and licencing to Microsoft. This gives cash of about $17.7 b. The actual cash payouts may be a bit delayed until the completion of the transactions; but, this should not matter much.

Assuming that its reported debt of Euro 5.4 b remains unchanged, we have net cash for Nokia at about $10.7 b.

We add up these numbers to arrive at valuation of Nokia's equity to be $6.5 b NSN + $1 b Here + $4.2 b Patents + $ 10.7 b Cash = $22.4 b. It is now trading at $25 b.  

Are we missing anything? Of course many things, but we don't know what until we know that in times to come.

Until then let's have more fun.

back to the airlines: Tata SIA

Tatas are going to start an airline business in India in collaboration with Singapore Airlines. An extract from Singapore Airlines 2012 annual report is noted below:

S$13 b of equity capital has been supplied by the shareholders and S$1 b by the lenders. While we can accept that lenders will be able to get their required rate of return, it is not the case for the shareholders of the company. Both return on capital and return on equity have been very poor.

Just look at the volatility in the operating income and net income in the past years:

How would you feel if you were a shareholder in this firm? There is no stability in the rate of earnings, requires a lot of capital, and is subject to severe competition and adverse market conditions. 

The only good news is that debt is not high, and whatever it is, carries a low cost.

Now, back to the Tatas; they have a long history regarding aviation is fine. But the economics of this business so bad that I wonder why investors would want to venture into this high-entry-barrier business. I say high-entry-barrier because, it has absolutely no competitive advantage, is submissive to the prevailing market conditions, generates very low return on capital, has no pricing power, and is capable of burning cash. 

Aren't these high-entry-barriers for sensible investors to supply capital?

Singapore Airlines shareholders had a choice of investing S$13 b (book value of equity) or S$12 b (its current market value) at a risk-free rate, and yet, would have earned similar returns compared to its 2012 earnings.

If they had additional S$13 b would they invest in Singapore Airlines stock now and ask for 3% returns? Probably not. They would ask for more; but how much more? Well, that's left to them.

Temasek Holdings (Pte) Ltd, the largest shareholder (55.86%) in Singapore Airlines, reports that its long-term returns to its shareholders is 16% p.a. Well, if that is the case, their investment in Singapore Airlines has not been that good.

If you were a shareholder of Singapore Airlines, how much would you ask? 

And how much the Tatas would ask when they start Tata SIA Airlines, that is, if they want to earn a fair rate of return? If the intention is to start the airline to fill that unfulfilled ambition, I have no questions, but wish them luck.

the $15.5 billion tweet - a sellers' game

The Twitter timing

We already know that Twitter will be valued well above $10 b for its IPO. What we don't know yet is its true value. Not that it matters during an IPO process; here all that sellers need is a platform and right time to sell. In a weaker market, the proceeds would not be good enough. So Twitter thought the current time is ripe for the moola:

The market is up from the lows of 2009 to what it is now. Good for the current shareholders. However, for the to-be shareholders it is a different game. There are at least two categories: Those who want to play the IPO game, the (very) shorter version, come what may. The early players might win the game, but those who time it late might suffer. Then there are those who want to play the longer version thinking that the business is good, the prospects are good, and therefore, they should be able to make a lot of money if they stayed long. They are hopeful.

Price and value

Hope is good. There is one problem, though. Everyone knows the price; none know the value. A dangerous combo. It matters less to the first category as they don't care about value. However, it is everything for the long-term players of the IPO game. Without understanding the true value of the firm, they play the game. Both are speculators; the punters. The lucky ones make money; others lose. If leverage is involved, what can we say? If none know the price either, no harm would be done; alas, it is not to be. 

The sellers' market

The IPO is always about the sellers' market: They get to choose the time when they want to sell and the price at which they want to. The odds are in their favor, big time. And the buyers are in delusion. The financial history tells something. Oddly though, what we learn from it is that we don't learn from it.

Twitter won't care

It does not matter for Twitter or Facebook, or any other firm which investment banks they choose unlike this report says. So what if Facebook price fell post IPO, and so what if LinkedIn rose? None were actually priced at their true value anyway. The sellers got the money they wanted. The future is all about actual performance. Comparisons to Facebook is inevitable. Facebook is now trading at the value of $112 b; its last twelve-month revenue is $6 b and operating income is $1.8 b. The market value is quite rich considering its current performance; but then the market discounts the projected performance based on its expectations. All Twitter and its folks want is as much stuff as possible at the cost of buyers. 

Twitter value

Twitter is projected to make about a billion in revenue in 2014. The ad revenues are very difficult to predict for the next year, leave alone for the next decade. Yet, what's the harm in predicting? When the market is fixated on $10 b plus, it is granted that Twitter is valued as such. No one will mention that it is less than that number. That's the crowd effect; the herd. 

Nevertheless, valuing these firms is a tall order. Without having access to the historical financial performance and its business model, it is impossible to value Twitter. Even with these made available it is difficult to estimate future cash flows.

My valuation for Twitter at this stage is: it is not possible to value it. Sounds familiar.

In spite of that lot many will give their value of Twitter. Sample this: 

1) $15.5 b

2) $100 b

3) $20 b

4) There are more numbers for sure.

Imagination knows no bounds. I envy the sellers and sympathize with the buyers. 

10-billion for twitter

Twitter has confidentially filed for a planned IPO; this is no more that confidential. If this report is to be believed, the firm, which currently has revenues of less than $600 m, could be worth as much as $10 b. 

But is it worth that much? 

Well, if you feed the right estimates into the model, it has the capability to give any value you want; $10 b is just a number, after all. 

Twitter could be worth more or less than $10 b; but, the frenzy in the coming months is sure to be there. There will be interesting views on its future, where every one will be happy to give opinion. 

Let's watch the show.

100 billion debt for verizon

Verizon currently has about $50 b of debt. It is now planning to issue about $60 b more. That's quite a feat for a firm which has $13 b operating income, which is likely to go up due to its acquisition of Verizon Wireless from Vodafone. 

Last year, Verizon Wireless reported $21.8 b in operating income and $75.9 b in operating revenue. Verizon will now claim 100% of this income rather than 55% before. Its market cap is likely to go up (if it is quoting at its fair value now), but not that much.

It surely has the capacity to service that debt based on its historical performance. But who knows about the future market conditions? Too much leverage is not good for the financial health.

Whether the acquisition is good news for Vodafone or Verizon, we are not that sure. However, the advisors are sure to make a lot of money off this deal. They have nothing to lose after all. You buy I win; you sell I win.

M&A gets going despite all odds. 

verizon-vodafone: identify the acquirer and seller

I can understand the headline - Verizon reaches agreement to acquire Vodafone's 45% stake for 130 billion. 

However, if that report has to be believed, the transaction involves: Vodafone would get $58.9 billion in cash, $60.2 billion in Verizon stock, and an additional $11 billion from smaller transactions that would take the total deal value to $130 billion. This report does not mention that, yet. 

Now, if Verizon's market value is $136 b, and $60 b is given away to Vodafone, the latter would own about 44% of the former. But here new stock is being issued.

The headline should have been - 45% of Verizon Wireless is sold to Verizon, and 30.6% of Verizon is sold to Vodafone. 

Who's better off?  Whether the deal will create value, only time will tell. 

The deal is supposed to become the third largest announced deal in the world after Vodafone's $203 b takeover of Germany's Mannesmann in 1999 and AOL's $181 billion acquisition of Time Warner in 2000. 

You are free to check out the history about the aftermath.

Interestingly, this report provides more insight into this bizarre deal. It says - The acquisition will be structured almost equally between cash and shares and will include Verizon exiting its 23 percent stake in Vodafone Italia. 

Now, the headline changes to - 45% of Verizon Wireless is sold to Verizon, 30.6% of Verizon is sold to Vodafone, and 23% of Vodafone Italia is sold to Vodafone.

This is really getting murkier. Imagine the deal which itself is almost equal to the market value of Verizon. Either the reporters don't know the exact details of the deal, or the deal is really bizarre.

I guess we need to wait for the coming days to get the real picture.